Understanding Islamic Finance - Doha Academy of Tertiary Studies

Participatory Modes: Shirkah and its Variants 337Rs. 1700/-. The principal redemption in each above-mentioned year will be subject toprofit/loss adjustments.NB: Sitara TFCs remained highly profitable; they gave a profit between 15 and 24 %per annum. The TFCs are not available in the secondary market as the holders lockedin, keeping in mind the high profitability.12.8 DIMINISHING MUSHARAKAHThe participatory contracts that may be more suitable for financing of fixed assets andpresent-day ongoing projects, particularly for financial intermediaries, can be based on theconcept of “Diminishing Musharakah” (DM). In the Diminishing Musharakah contract, aparty, after participation in ownership of any business/project, can liquidate his investmentfrom the asset or the ongoing business. The jurists are unanimous on the permissibility ofthis arrangement. 92 DM contracts contain a sale provision, according to which, one partnermakes a promise to sell his part of ownership to the other party periodically. As discussedearlier, jurists have opined that promises are enforceable, and a court of law can compel apromisor to fulfil his promise, especially in the context of commercial activities. 93Diminishing Musharakah as a financing technique, however, is a new type of contract,suggested by contemporary jurists keeping in mind the problems perceived while discussingthe traditional Musharakah/Mudarabah principles in the broader economic perspective. Thisinvolves the concept of Musha‘a, which means undivided ownership of the asset by thepartners. All co-owners are owners of each and every part of the joint property on a pro ratabasis and one partner cannot claim a specific part of the property leaving other part(s) forother partners. Further, it is allowed to lease Musha‘a to another joint owner.A DM arrangement may consist of two or three subcontracts, i.e. in the case of assets thatcould render any service, and hence they could be leased, there would be three subcontracts:partnership by ownership between two or more persons, leasing by one partner its share in theasset to the other partner(s), selling by one partner its share to the other partner(s); and in the caseof partnership in trade of assets that do not involve leasing, it would involve two subcontracts:partnership and sale. This factually becomes a general partnership and all rules of Shirkahal‘Inan are applicable to it. One major point to be taken into consideration in this type of DMarrangement is that one partner cannot sell his part to the other partner at a pre-agreed price. 94All, two or three subcontracts are considered permissible by the jurists, particularly whenthe sale/lease contracts are stipulated among the partners, i.e. assets are sold/leased to thepartners. 95 Thus, the combination of Shirkah and lease contracts does not create any Sharī´ahrelatedproblem. Sale of a part by a partner to the other partner should be separate andindependent from the Shirkah or leasing arrangement.There is some difference of opinion regarding leasing out an undivided share to a thirdparty. While Imams Malik, Shafi‘e and Abu Yusuf allow it, Imams Abu Hanifa and Zufurdisallow the letting out of the undivided share to any third party. As per the present practice92 Al-Kasani, 1993, 4, p. 493.93 For details, see Usmani, 2000b, pp. 363–368.94 Usmani, 2000a, pp. 91, 92.95 Ibn-Qudama, 1367 AH, 6, p. 137; for details see Usmani, 2000b, pp. 357–360; AAOIFI, 2004–5a, p. 215.